One keen market analyst who is into Stock Trading seems to have said that Traditional ‘Value’ investing is dead !
What then is the need of the hour that traders and investors find allure in, in 2021? Something that obviously gives negligible importance to Value of a stock . So, they try to find the X-Factor in Stock trading that does not merely ask for doubling or trebling of stock value in say 2 or 3 years. Instead, they look for stock that can be phenomenal winners, ie price appreciation of 100% or more, called the Multibaggers. Not just one of its kind. A host of them to build the cornerstone of their portfolio.
What is multibagger stocks
Multibagger stock is a name coined by Peter Lynch, in his bestseller ‘One up on Wall Street’ where he refers to small-cap stocks which are able to multiply in terms of ‘no of bags’, each bag representing stock appreciation that is doubling in original value. Thus a 10-bagger would refer to a stock which appreciates ten times its value.
Historically in Stock Trading , Value stocks refer to those that are viewed as ‘Undervalued’ or trading below their intrinsic value, but with strong fundamentals. Now the exponents of ‘Multibaggers’ bring up the concept of ‘Growth investing’ as against ‘Value investing’ as a priority. With the huge increase in traded volumes in Stock trading, pure value investing opportunities are few and far between and not available for long. Cheaper stock that remain underpriced long, may lead to a ‘Value trap’ which are not investment worthy.
Conversely, Multibaggers would be companies which are on a fast-track stock trading growth trajectory, even if the valuation shows a degree of overpricing in the short run, vis-à-vis its intrinsic value. Though this may not be the original concept when the term was first used, the attractiveness of Multibaggers depend on the holding periodof the stock, before it is able to appreciate to this extent. The shorter the holding period, the larger the ‘bagger’ and the smarter the investor.
Tips to identify multibagger stocks
‘No Research without action and No Action without Research’ is a dictum that pays rich dividends in case of investments in stocks while online stock trading , especially so for Multibagger Stock trading . Research of even the most simplistic nature could reveal growth potential of stock and its future growth prospects in following parameters:
a.Earnings potential demonstrated through consistent track record of high Earnings per Share (EPS) which is also available at a reasonable price ie. a low PE ratio (Price to Earnings)
b.Screening stocks using the Graham Multiplier formula, to find stocks <22.5 which is arrived by:
PE X PBR
(where PE = Price to Earnings Ratio & PBR = Price to Book Value Ratio)
c.Cash flow comfort in the short run and Leverage enjoyed through low Debt/Equity ratio (not > 2.5)
d.Efficient management of the business by a strong and reliable team
Competitive advantage the company enjoys which is demonstrable through product and services that could stay sustainably in the forefront in the coming years
A robust future for the industry the stocks fall under.
Risk Involved in multibagger stocks
If Multibagger stocks are identified as potentially fastmoving ones in shorter time-frames, then they could be susceptible to untoward reversals and collapses as well, being highly sensitive to market ripples. Their risk-reward ratio is high making them not dependable till they deliver profits
Overvalued stocks with indicatives like high PE(Profit to Earnings), Low liquidity, earnings constraint etc.
Belief systems based on market recommendations available on stock trading apps that Multibaggers will turn a person a millionaire overnight, when investment is not analysis backed
False notion that cheaper picks in market (penny stocks) have greater growth potential than value stocks
Conviction that even if the market is bearish, Multibaggers will defy the general trend
Given the fact that holding period before reap could be uncertainly long, it is unwise to stop monitoring the financial health of the investments. All Multibaggers may not be fruitful in the timeframe planned and sometimes exit timing could be unanticipated
While not exiting such stocks in case of adverse signals would be a mistake, so too would be, an impatient attitude as many Multibaggers take time to yield their true potential. Some take negative turns before bouncing back and need the investor to understand the market factors and their future upside prospects, to stay invested.
Tips to avoid risks
Timing of entry for trading in a stock is very crucial. Traders must avoid getting caught in a bull trap in times when stocks ‘apparently’ break a resistance level, but after multiple attempts find themselves in a bear market. Build-up of momentum must be strong enough to avoid it.
Reasonable price levels and valuations must always be aimed for, while buying Multibaggers. Else, the profits get muted and the investor is unable to harness the growth potential, even after finding the right stock.
Source of tips and recommendations received must be checked and found to be authentic, in order to avoid investment losses. Even the best stock trading platform cannot make up for unreliable information.
Research time and trade timing errors could be avoided by trading in Exchange Traded Funds (ETFs) which proxy the stock or sector being identified, where liquidity issues are faced in a market.
Most of these wisdom would be applicable equally well to Stock and Commodity markets’ trading
